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What happens to defaulted federal loans?

SDMarik
Frequent Contributor

What happens to defaulted federal loans?

Was speaking with a a co-worker recently who had some federal student loans charge off a few years ago.

 

They claimed to have stopped paying them like 6 years ago and the charge off happened like 4(ish) years back.


According to them, their scores are back in the high 600's and they feel as if they "dodged" this debt.

 

Other than the govt taking their federal tax returns and them not qualifing for future federal loans, is this really just going to fall off of their report in the next couple of years like

it never happened (for private lending, anyway)?

  



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2 REPLIES 2
calyx
Super Contributor

Re: What happens to defaulted federal loans?

Those loans could come back on their credit report at any time.
If they need to borrow a large sum or get a mortgage, they'll be there haunting again.


Also, while in default they can rack up massive fees, which prevents the loan from being paid off as quickly as if they were just paying on their own.    And while they're only having their tax return garnished now, the feds can (and will) go after paycheck garnishments directly from their employer.

 

The debt doesn't magically go away.  CRAs have by in large automated their reporting, so that while the debt may disappear after the 7 years, it cannot be discharged permanently  on its own.  I know plenty of people who have had old loans pop back up on their credit reports or get reported to lending agencies while trying to get mortgages, etc.

F8 EQ: 802 | EX: 779 | TU: 791 | Accounts: 0/6 2/12 6/24 | Reporting: AZE8
Happy practitioner of AZE7or8or9or10 | Team Finances > FICO
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calyx
Super Contributor

Re: What happens to defaulted federal loans?

I had a thought about this last night - if the feds are indeed marking defaulted loans current as has been reported through news sites - it actually will bring the loan back current for your coworker (whether they like it or not), so they'll need to start payment or their credit will crash and burn.

F8 EQ: 802 | EX: 779 | TU: 791 | Accounts: 0/6 2/12 6/24 | Reporting: AZE8
Happy practitioner of AZE7or8or9or10 | Team Finances > FICO
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